Trends in global energy & resources M&A

Global trends in energy and resources dealmaking emerge in a new report published by Squire Sanders in partnership with mergermarket. The Energy & Resources 2012 Report, the first in a Global M&A Series, analyses data on dealmaking activity in energy, mining and utilities in 2011 and assesses the challenges and opportunities facing these sectors in the coming year.

Key findings of the report:

Overall, energy, mining and utilities deals up 7% in value, but down 9% in volume (1261 deals worth a combined US$ 577.3 billion in 2011).

Energy deals (including oil and gas, power and renewables) dominate, with combined value of US$ 396.5 billion compared to US$ 127.8 billion in mining and US$53 billion in utilities.

Investments into renewable energy dipped slightly (from 309 deals in 2010 to 265 in 2011) but remain a stronger driver for deal activity and have increased in value (up to US$ 34.4 billion from US$ 21.5 billion).

Mining deals globally dipped by 8% to 267 in 2011.

Continued dominance of North America – more than half of global deal value (51%) went to North American targets, while the money for 44% of deals came from North American bidders.

Growing importance of Asia-Pacific with exactly a quarter of global deal value in 2011 coming from Asian investors (up from 19% in 2005 – 2010).

Increasingly international nature of M&A, with cross-border deals reaching their highest level on record (42% of all deals, and 47% of aggregate deal values).

More than half of cross-border deals (52%) were stake acquisitions.

Commenting on the trends, William Downs, Squire Sanders’ Global Practice Group Leader for Corporate and Corporate Finance, says: “With this report we aim to offer some perspective and insight into the deal activity of a broad sector which continues to show itself as one of the busiest in global markets, despite economic volatility, constrained lending, and a dip in private equity involvement. Some key themes emerge from the report, which give us some clues as to the way the markets will evolve in 2012.

“The figures show that cross-border deals continue to grow in importance, 42% of all deals (up from 39% in 2010). This is the highest level on record, suggesting that regional boundaries in the global industry are starting to dissolve, and will continue to do so as foreign buyers look for more stake acquisitions to reduce financial and operational risk.”

“Looking at the sectors,” comments Trevor Ingle, Partner in Squire Sanders’ Energy & Natural Resources Group, “energy transactions, largely fuelled by strategic consolidation in the US, clearly exceeded mining and utilities M&A in both volume and value; whilst within the energy sector itself renewable energy investment, while still dwarfed by oil deals, shows itself as a significant driver of deal activity – more than a fifth of all deals recorded in energy and resources were renewables-related.

“Geographically speaking, the North American market remains dominant in all sectors, but the figures reveal the increasing importance of the Asia Pacific region, which contributed to 25% of all deal value. Inevitably, China attracts most of the media attention in terms of investment into foreign energy and resources projects and utilities assets but it’s worth stressing that other countries of Southeast Asia should not be overlooked. Southeast Asia saw 48 deals worth US$ 16.4 billion in 2011 (up from 42 worth US$ 12.3 billion in 2010)”.

Duncan Maclean, Squire Sanders’ Perth-based Global Industry Group Leader for Energy & Natural Resources, adds: “Of course Asia-Pacific deal flow reflects in large part the strength of Australia’s expanding mining industry, the largest market for M&A globally – last year there were 59 deals worth approximately US$ 22 billion. Deal activity slipped somewhat in 2011 though the shake up from the Glencore-Xstrata planned megamerger is likely to transform the landscape in 2012. Cash-rich players will be looking to bolt-on acquisitions and opportunities to maintain market share – and certainly the appetite for raw materials in emerging markets in Asia – not just China but growing economies such as Vietnam – will surely act as a buy-side driver.”

On the outlook for M&A activity in 2012, William Downs concludes: “Deal flow in 2012 will continue to be concentrated in the Asia-Pacific and North America regions, with Western Europe remaining important particularly for energy and utilities. Cross-border activity, including the increased use of stake acquisitions, is surely only going to grow. Alongside the economies of Southeast Asia, an emerging market to watch, perhaps, is Sub-Saharan Africa which is the only region where mining is more active than energy in terms of potential targets.

“No doubt there will be continued focus on all kinds of renewable energy, while the potential for natural gas extracted from shale may also prove to be a significant deal driver, despite the ongoing public debates about its risks. It will be interesting also to see whether favourable exit conditions drive private equity in the energy and resources space. Whilst exits last year dipped 27% in value, generally the numbers are trending upwards, from 37 in 2009 worth US$ 3.7 billion to 52 in 2011 worth US$ 14.7 billion.”